Some industries are born to embrace change; it’s in their DNA. Some are made to change; it’s adapt or fall by the wayside. Others have change thrust upon them. Such was the case with the implementation of the “Uncleared Margin Rules” for derivatives beginning in September 2016. The new rules, which are rolling out in phases through September 2020, have caused the securities industry to examine the events between the September 2016 Initial Margin (IM) rollout and the March 2017 Variation Margin (VM) rollout and respond with a more scalable and efficient documentation process.

In September 2016, firms covered by Phase 1 of the new IM rules were required to put new legal agreements in place to cover the bilateral exchange of IM as well as Custodian Agreements to ensure the resulting IM Collateral was appropriately segregated. Although each of the 26 firms in scope for this phase managed to get most of their documentation in place to meet the deadline, the experience did highlight two key areas that needed considerable improvement. Both the process and the time required to negotiate IM Credit Support Annex (CSA) and Custodian Agreements, as well as subsequent account set up was severely underestimated and not scalable. Regulators had to provide relief to the Phase 1 firms to allow them to finish the required custody setups.

In March 2017, though the industry made a valiant attempt to achieve full compliance ahead of the (VM) regulatory deadline, it became clear as March approached that many firms would fall short. The regulators relented and again provided additional time for firms to finish negotiating their agreements. This experience re-exposed several key weaknesses in market practice.

A lack of automated analytics for determining what agreements needed to be put in place impacted both the IM and VM processes. Existing agreements were not available in a digital format, regulations were not captured as digital rulesets and so producing the required documentation required a significant amount of manual intervention.

Firms struggled with the volume of new or amended documents as the manual, paper-based process made it far too difficult to negotiate agreements efficiently, timely and accurately.

It still took too long to operationalise the information once both parties finalised a CSA agreement. With no mutually agreed “golden copy” between both parties to feed their respective downstream systems, differences and disputes based on each firm’s interpretation of the data occurred.

The outcome was something just short of chaos. It was a clear signal that the current process was broken and that something had to change.

Resolving only part of the problem

Since March 2017, some market participants have attempted to address these problems by developing on-line CSA negotiation platforms. Other market participants and custodians have begun to modify their client portals to support the negotiation of Eligibility Schedule and Account Control Agreements, while document digitisation vendors have accelerated their efforts to market their services which “read” paper- based documentation and transform them into digital records as part of the solution mix.

These services will indeed help ease the expected crush of new agreements that need to be put in place ahead of the well-documented IM Big Bang in September of 2020. However, “digitising” the legal terms that have been negotiated between two parties or simply moving the “back and forth” between lawyers negotiating via email and Microsoft Word to an on-line document exchange only resolves part of the problem.

Many of the fundamental issues that create operational complexity, layer in costs, cause delays in down-stream system setup and create disputes remain unsolved. These issues include:

No digitised operational preference and setup information to accelerate downstream setup of data.

Taking a comprehensive approach

These key missing elements highlight the need to act quickly to avoid repeating data-handling mistakes of the past. To truly go beyond current agreement automation limitations, market participants need an agreement infrastructure that facilitates interoperability, growth and adoption of these new technologies while maintaining client choice.

When these initial market efforts are evaluated collectively they fall short of where the market needs to be. The solutions are all taking a “closed” or proprietary approach that requires their users to separately integrate or login. While each solution might improve one or more parts of the negotiation process for an individual firm, they do not resolve the wider industry need for agreement data to be shared among multiple parties.

Industry-owned and backed RegTech firm AcadiaSoft has recently released software that establishes a digital “golden record” of business-critical legal and operational data with a single point of integration to a workflow that facilitates interoperability. These services are designed specifically for the task - enabling a firm to select its preferred negotiation solution-provider or vendor while at the same time communicating with peers who choose to use another negotiation provider, agreement management vendor or doc portal. Ideally the market needs an easy-to-deploy solution with seamless integration and quick set-up for internal documentation, with margin support for post-agreement completion. At the moment, only AcadiaSoft, through its AcadiaSoft Hub and AgreementManager Service, checks all of these boxes.

In short, the market is demanding a shift from “data standards” to “standardised data.” Volumes are escalating, and it is only through standardised data that we can achieve greater certainty and capacity in operational processes.

The market now acknowledges that there is an inherent weakness in only adhering to data best practices as this often results in firms implementing data in their own format, creating inconsistencies and disparities between each firm’s records. By moving to a standardised data model there is only one agreed format and dataset for all counterparties to follow. The certainty that this brings is at the core of a more efficient workflow across the markets.

Benefits across the organisation

This new approach to data management will deliver the benefits of trust, transparency and data certainty to all types of market participants. Manual, paper-based tasks can be eliminated using smart technology, allowing for a more efficient use of resources. With the data agreed in advance, lawyers, SMEs and decision-makers will be able to focus their attention on exception processing, as well as the more intricate, commercial and complex aspects of contract negotiation.

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